Will Nvidia's Mouthwatering Rally Hit A Wall? Fund Manager Says AI Stalwart Poised To 'Grow Higher For Longer' Ahead Of Q4 Results

High-flying chipmaker Nvidia Corp. NVDA is scheduled to report its fourth-quarter results after the market close on Wednesday. Deepwater Asset Management’s Gene Munster on Thursday offered his take on what you expect from the company’s quarterly report.

Hittable Target: “To say that their [Nvidia’s] expectations are high is an understatement,” said Munster in a video clip shared on X, formerly Twitter. Analysts, on average, expect the company to report $4.56 per share on revenue of $20.37 billion, according to Benzinga Pro data. This is sharply higher than year-ago numbers are 88 cents per share and $6.05 billion.

Munster pointed out that the stock has surged approximately 200% in the past year, catapulting Nvidia to the position of the third-largest valued tech company.

As the Jensen Huang-led company prepares to roll out its financial scorecard, the fund manager said the pressure point will be about the growth outlook for the calendar year 2025. “That’s where all eyes are going to be focused,” he said.

Nvidia will likely exceed the 236% growth Wall Street is modeling for the fourth quarter due to improving supply, Munster said, adding that the company emphasized it during its third-quarter earnings call. The company also said it expects continued improvement in supply throughout 2024, he noted.

“That should be a tailwind to revenue despite the law of large numbers and the difficulty to grow,” the tech venture capitalist said. “I think their commentary about supply improving is going to have a positive impact.”

Munster noted that the Street is modeling 60% revenue growth for the calendar year 2024. This is achievable, the analyst said, adding that analysts will likely bump up their expectations despite the China overhangs. America’s China chip ban prevents Nvidia from exporting its high-performance, most advanced chips to the country, and the economic fundamentals of China, a key market for Nvidia, are faltering.

“When you look at the big picture relative to the negative of China, relative to the positive of what’s going on with AI, I think that China piece of next seven years is going to be noise,” Munster said.

See Also: Best Artificial Intelligence Stocks

The Pressure Points: Wall Street’s expectation for the calendar year 2025 is for 16% revenue growth, down from an estimated 60% growth the current year, Munster said.

“So the Street is basically looking for their business to hit the wall in calendar’25, in large part because of the law of large numbers, and also it’s hard to imagine that this can continue,” the fund manager said. The impact of the declining revenue growth rate on the stock’s current trading multiple shows that investors believe the growth will hit the wall in 2025, he added.

After the fourth-quarter earnings release, Munster expects upward revisions to earnings growth estimates, potentially raising the 2025 estimate from 20% to 25%.

The stock is currently trading at an earnings multiple of 30 times almost the same growth rate as has been estimated for earnings, Munster. This is in contrast to what is seen in other companies, he said, adding that Alphabet, growing earnings by 10-15%, trades in the low 20s, and Apple, growing earnings by 9% trades in the high 20s, he noted.

“Nvidia [is] perceived as much more of a boom-and-bust versus a stable business like other large-cap tech stocks,” Munster said.

“I want to make the case that I think that this is not a boom and bust type of business and that this business can continue to have stability to it.”

Regarding how long Nvidia can keep growing, Munster noted that Huang mentioned three growth drivers at the Microsoft Connect conference, namely:

• The first phase of AI, which is currently on, is the hyper scalers, the big tech companies building cloud infrastructure as well as AI startups.
• Second, the enterprise wave pertains to enterprise applications, potentially from companies such as Salesforce and ServiceNow or any applications
• The third wave is the biggest wave happening with heavy industries

Munster also referred to what Huang mentioned recently, the Sovereign AI wave, in which countries will build their own AI, specific to their intelligence and also their culture.

“And I think those 4 drivers are part of the reason why I believe that Nvidia can grow higher for longer,” Munster said.

Price Action: Nvidia ended Thursday’s session down 1.68% to $726.58, according to Benzinga Pro data.

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